GENC3003Personal Financial Planning Andrew Hingstonandrew.email@example.com Unit 2: Savings and Smart Buying
2 Discussion What are some ways to cut back in expenses while at university in order to save more?
3 Saving versus deferred spending “I’m saving to go on a holiday” This is just a “delay” in spending money! Real saving = never plan to spend the money Let’s call this real savings your “investment capital” The goal is to never spend your investment capital Investment capital generates returns Invest in property = generates rental income Invest in shares = generates dividend income Spend the returns … not the investment capital!
4 Why is saving important? Regular saving = behaviour = become wealthy Overspending = behaviour = poverty or financial stress Income comes from two sources You working and earning a salary Your investments working and earning returns … so increased savings = increased income Savings required to buy a house Savings required to start investment portfolio Savings buffer of $10,000 = peace of mind! Savings cover large unexpected expenses
5 Where do savings come from? Savings = Total income (salary and investment income) Less tax Less rent or interest on mortgage payments Less living expenses Increase savings by: Increase salary Increase investment income Reduce tax Appropriate housing strategies Reducing living expenses
6 How to save more? Stop spending 110% of income! Reduce expenses by 10% or more Relearn what is a “need” versus a “want” Learn “contentment” Learn the “behaviour” of always savings Then … work at increasing your salary increase your investment portfolio develop some good long-term strategies
7 Is this real long-term saving? Money left in a transaction account – NO Probably not if it is going to be spent next month! Money in high-interest savings account – YES Mortgage payments – NO Most of mortgage payment is actually interest Only payment less interest is saving (10% at start of loan) Superannuation put in by employer – YES Saving for holiday – NO (deferred spending) Saving for car – NO (car goes down in value) Saving for anything that goes down in value – NOT saving!
8 Setting goals Easier to save if you have some goals Visualising goal makes it easier to forgo spending now … in exchange for future future happiness Examples of goals: New car for $12,000 by 30 June 200X (really deferred spending) Holiday $5,000 on 5 Jan 200X (really deferred spending) Deposit on first house $30,000 by 31 Dec 201X (real saving)
9 How much to save Work out how much goal will cost – Eg $12,000 Work out when you want it = 5 years Calculate number of months = 5 x 12 = 60 Divide amount by number of months = $200 You need to save $200 per month Yes, you will receive interest on these savings But it will cover you for the fact that most people under-estimate the total cost! To work it out exactly, use =PMT( ) function in Excel
10 Saving tips Save little, save often Keep spare coins in jar and deposit in bank each month Direct debit $X per month into a separate account Make sure you are receiving good interest ING Direct Savings Maximiser pays high interest Compound interest means savings grow exponentially “But I’m a student” Start a good saving behaviour with $50 per month. Live like a student for 2 years after graduating!
11 Don’t treat shopping as a “hobby” Don’t buy unless you have the money to do so Pay with cash (it feels more expensive than cards) Shop around and wait for the sales Substitute water for coffee and BYO Make your lunch to uni/work Shop at Aldi rather than Coles / Woolies / 7-Eleven Buy second-hand on Ebay – then sell it again! Give up on smoking, gambling and binge drinking
12 Delay buying something for two weeks Often after some time you realise you can do without Try classical conditioning Say out loud 10 times … “I cannot afford this now … I need to save money instead” Track your expenses to keep you accountable Putting things into a spreadsheet is a hassle Creates a disincentive for small purchases Spreadsheet keeps you accountable each month
13 Cut up credit card if you can’t pay full balance Stay away from buying “Interest free” Personal loans – for people who can’t save Don’t let your parents borrow against the house Home loan rate is much lower than personal loan rate But term on a home loan (25+ years) is much longer than a personal loan (2-5 years) End up paying a lot more interest Unless disciplined enough to make extra home loan payments
14 What if I’ve got credit card debt? Recognise you may have a serious behavioural problem UNSW COMPAS Counselling Service (Free) http://www.counselling.unsw.edu.au Wesley Mission Financial Counselling Helpline (Free) Phone 1800 808 488 Most important steps: Realise that you have a problem Talk to your bank – banks hate zero communication! Move your credit card debt into a personal loan with bank Cut up your credit card and pay off personal loan
Stop and read Now read: Chapter 3 Saving Faster Chapter 4 Smart Buying and Credit 15